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$2tn Debt Crisis Threatens to Bring Down 100 US Cities
Overdrawn American cities could face financial collapse in 2011, defaulting on hundreds of billions of dollars of borrowings and derailing the US economic recovery. Nor are European cities safe – Florence, Barcelona, Madrid, Venice: all are in trouble
More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.
Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery.
"Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy," Whitney told the CBS 60 Minutes programme on Sunday night.
"There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults - more. This will amount to hundreds of billions of dollars' worth of defaults."
New Jersey governor Chris Christie summarised the problem succinctly: "We spent too much on everything. We spent money we didn't have. We borrowed money just crazily. The credit card's maxed out, and it's over. We now have to get to the business of climbing out of the hole. We've been digging it for a decade or more. We've got to climb now, and a climb is harder."
American cities and states have debts in total of as much as $2tn. In Europe, local and regional government borrowing is expected to reach a historical peak of nearly €1.3tn (£1.1tn) this year.
Cities from Detroit to Madrid are struggling to pay creditors, including providers of basic services such as street cleaning. Last week, Moody's ratings agency warned about a possible downgrade for the cities of Florence and Barcelona and cut the rating of the Basque country in northern Spain. Lisbon was downgraded by rival agency Standard & Poor's earlier this year, while the borrowings of Naples and Budapest are on the brink of junk status. Istanbul's debt has already been downgraded to junk.
Whitney's intervention is likely to raise the profile of the issue of municipal debt. While she was an analyst at Oppenheimer, the New York investment bank, in October 2007 she wrote a damning report on Citigroup, then the world's largest bank, predicting it would cut its dividend. She was criticised for being too pessimistic but was vindicated when the bank was forced to seek government support a year later. She has since set up her own advisory firm and is rated one of the most influential women in American business.
US states have spent nearly half a trillion dollars more than they have collected in taxes, and face a $1tn hole in their pension funds, said the CBS programme, apocalyptically titled The Day of Reckoning.
Detroit is cutting police, lighting, road repairs and cleaning services affecting as much as 20% of the population. The city, which has been on the skids for almost two decades with the decline of the US auto industry, does not generate enough wealth to maintain services for its 900,000 inhabitants.
The nearby state of Illinois has spent twice as much money as it has collected and is about six months behind on creditor payments. The University of Illinois alone is owed $400m, the CBS programme said. The state has a 21% chances of default, more than any other, according to CMA Datavision, a derivatives information provider.
California has raised state university tuition fees by 32%. Arizona has sold its state capitol and supreme court buildings to investors, and leases them back.
Potential defaults could also hit Florida, whose booming real estate industry burst two years ago, said Guy J. Benstead, a partner at Cedar Ridge Partners in San Francisco. "We are not out of the woods by any stretch yet," he said.
"It's all part of the same parcel: public sector indebtedness needs to be cut, it needs a lot of austerity, and it hit the central governments first, and now is hitting local bodies," said Philip Brown, managing director at Citigroup in London.
In Europe, where cities have traditionally relied more on bank loans and state transfers than bonds, financing habits are changing. The Spanish regions of Catalonia and Valencia have issued debt to their own citizens after financial markets shut their doors because of the regions' high deficits. Moody's cut to the rating of the Basque country on Friday left it still within investment grade but noted "the rapid deterioration in the region's budgetary performance in recent years". It said it expected it to continue over the medium term.
In Italy, Moody's and S&P have threatened to downgrade Florence, while Venice has been forced over the past few months to put some of the palazzi on its canals up for sale to fund the deficit.
"Cities are on their own. Governments won't come to their rescue as they have problems of their own," said Andres Rodriguez-Pose, professor of economic geography at the London School of Economics. "Cities will have to pay for their debts, and in some cases they will have to carry out dramatic cuts, such as Detroit's."
California crunch
Vallejo, a former US navy town near San Francisco, is still trying to emerge from the Chapter Nine bankruptcy protection it entered in 2008.The city, now a symbol of distressed local finances, is still negotiating with the unions, which refused to accept a salary cut plan two years ago. Paul Dyson, an analyst with the Standard & Poor's credit agency, said Vallejo, which is mostly a dormitory town for Oakland or San Francisco employees, did not have enough local industry to sustain its finances and property tax - a major source of local income - plunged with the collapse of the real estate market. The S&P credit-rating agency has a C rating on the town - the lowest level.
With a population of about 120,000, Vallejo has $195m (£125m) of unfunded pension obligations and has to present a bankruptcy-exit plan to a Sacramento court by 18 January. Since 1937, 619 local US government bodies, mostly small utilities or districts, have filed for bankruptcy, Bloomberg News recently reported. US cities tend to default more than European municipalities as they usually rely on bonds issued to investors, which enter into a default if the creditor misses payments. European towns, by contrast, traditionally depend on bank loans and government bailouts.
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85 Comments so far
Show AllAnd who do you think is going to foot the bill for this debt that would be far less severe if the wealthy, who have been and continue to enjoy their tax cuts, had paid their share of taxes? No mention of that in this article, but sure enough, a hint at how horrible the unions, representing workers, are for not accepting a pay cut.
ALIEN: The tax GIFT to the wealthy, the pork spending (or corporate welfare) to major players, ADDED TO the military taking half of U.S. taxpayers' money... it is largely those 3 misplaced priorities that are causing the shut-down of necessary public services. Of course in Europe, the military aspect is not a major player; however, their banks bought into the Wall St "Alchemy Craze" that led the greediest to get on-board when it came to inflating home prices, and then betting against those who couldn't keep up with the payments. The burst of that pinata was inevitable. Long after the criminals got away from the crime scene, their bloated bonuses intact... we learn little by little of their complicity with its cause.
Truly all this is the work of "The Chicago School," and Naomi Klein wrote THE treatise on its game plan. Of course that work was published several years ago, before the same "fiscal austerity" practiced on Chile, South Africa, Russia, and Poland was perfected to the point it could be implemented in Europe and now the U.S.
When people are hungry, their political loyalties are easier to purchase. Another feather in the American Fascist cap...
Too true. There has been, of one has been paying attention, plenty of warning about this. In one of the John D. MacDonald Travis McGee novels from the late 60s or early 70s, McGee's economist best friend Meyer opens the book musing about the global debt crisis.
I've been trying to find which book this was so I could quote it and post it exactly with the date, but so far my Googling has let me down.
I did see it coming and, with the help of my wife, paid off my foolishly accumulated credit card debt and now I may make it through old age but only if the Powers That Be don't decide it can't afford all us retirees with Social Security and pensions, and kick us to the curb.
I posted part of you comment here,
http://newimprovedgorman.blogspot.com/2010/10/forgotten-books-purple-place-for-dying.html
They might come to your help. :-)
There is a simple solution to all this:
Tax The Rich.
Every day, perhaps a hundred-thousand well-paid people travel into downtown Pittsbugh to work. Yet except for a measly $52 tax out of their first paycheck, they contribute nothing to the city's operations. An income tax of just 1% on commuters from the rich suburbs would raise fabulous sums of money. City residents already pay a regressive 3% wage-only tax, so thay should not be asked to pay more).
You must be a PA resident. That 52 dollars is not a tax but a kick-back to your local community. Your town or city penalizes you for getting up and going to work in the morning. Funny how the pigs raised it to 52 from 10 after 9/11. They capitalized on a tragedy and changed the name of the kick-back.
The people who live in the Suburbs and commute to work in the major cities are a major reason those cities suffer traffic congestion and have to continually repair their road systems. Yet they are not taxed for the same as they are not "residents".
The taxes in the suburbs tend to be lower then in the cities. Spending 8 hours day "In the city where one works" thus using that cities highways, police and fire services and infrastructure, while living in the Suburbs is the very defintion of a free ride.
gnken
"Guys - Guys" you must stop attacking each other and start to work together to solve this problem. Yes the Rich should certainly pay there fair share of taxes. As all Tax Payers should. The years of Tax Cuts and cuts in Federal Spending and 30 years ago the talk of "Trickle down Economics" Well as G H W Bush called it in 1980 as "Voodoo Economics". Caused the States and Cities to be cut and there you have it. Well there you have it. The "Voodoo that they did so well"
gnken1
How about; STOP making war on the World ?!
I'm jumping in here for no particular reason - only that you mentioned taxing.
Every once in awhile I hear of a flat tax. Has anyone ever done the math? It seems to me that a 10% tax would provide plenty. I'm talking about a flat tax with absolutely NO deductions. I'm sure that there would be reactionary screams from the tax preparation industry - but, the simplicity of the idea appeals to me.
I vaguely remember an attempt at cutting costs by one percent (Graham, Rudman ??) In an attempt to implement the act, instead of applying it accross the board, all kinds of exceptions were made. Of course, the military was exempt from the beginning. It was a total flop.
As much as I resent the rich getting over, the estate tax bothers me. It seems that some monies are double-taxed - once when made; again when saved. A third taxation upon the death of an individual seems ridiculous --probably revengeful.
OF COURSE a flat tax would be the most logical, reasonable, simple, fair, equitable, financially sound, growth potentiating, and down right fabulous...
hahhahahaha
and you expect the American government shit heads to actually be able to comprehend accomplishing just one of those acts....hahahahahahaha
The US Chamber of Commerce's Union Busting is paying off for them.
Now they will have an entire nation of slave laborers.
Wondering if we could have a class action lawsuit to stop tax breaks for the rich? Any radical lawyers out there?
great idea
We will have to raise taxes.
Eliminating the taxable limit of 108K on S.S. would solve the S.S. problem.
The rich are sitting on 12 trillion dollars in assets not including their homes and cars.
Corporations are sitting on record amounts of profits.
Their is an estimated 11 trillion dollars sitting in off-shore accounts untaxed.
And who do the f-----g a-----e governments go after.
Only Wall Street recovered and that will collapse again in the near future.
Yes, Jamie Dimon (one of the too-big-to-fail banksters)recently told the world to expect economic meltdowns every 5 to 7 years.
Each meltdown will of course require ever larger bankster bailouts that require the gov. to borrow more money and result in further cuts for "domestic programs".
Banksters will become wealthier with each subsequent meltdown while the rest of us will become poorer.
yohocoma,
Yeah, I saw the 60 Minutes piece of crap and was left with the same feeling you had. According to the "journalists" that put on that charade, it's the teachers and public employees with their big pensions that are destroying the US economy. And the answer to that? Of course, to cut workers' pensions to the bone. Don't hear about cutting the banksters off. Don't hear about corporate tax evasion. Don't hear about corporate fraud. It's always the outrageous demands of the unions that put us in this fix.
I say, cut us all. Give us all fifty percent of what was promised and then watch the economy go even further in the toilet because a large block of people no longer have money to spend. We will take down the economy faster than they can imagine--and, as far as I am concerned, the faster, the better. It's time for people to take to the streets to get what is rightfully theirs.
Although certain groups of CORPORATE, and public employees (GE, Boeing, US Gov. (civil service and miltary), Cal PERS, and some others do have very generous retirement packages, the majority of public employees have packages that while better than no retirement, they are barely enough to pay the bills unless you move to a third world country (a third world country other than the US, that is). Most private sector employees' retirment package is limited to hoping that Social Security lasts longer than they do.
It is time to move beyond the hyperbole that anybody eligible for a pension is in fat city, and identify who is getting what and how we can level the field.
Some corporate and public pensions provide medical insurance at little or no cost to the retirees and others require retirees to pay full freight for insurance. All of these factors need to be considered.
Credit ratings may be used as weapons against entities straying from the Global Corporate Oligarchical path.
It is the WEALTHY PREDATORY CAPITALIST WELFARE KINGS that derive the most benefits from taxes and should pay for these benefit with higher tax rates, but instead get tax cuts. Their worldwide assets are protected by the Pentagon/spy agencies funded by the Treasury bond proceeds of the national debt, which Admiral Mullen has declared a national security risk yet it funds the Pentagon, a threat to national security according to Mullen. The forced contribution for taxes is used to fund the Pentagon/spy agencies, a threat to national security, to protect US from threats to national security, this is a classic mafia protection racket and Al Capon would be green with envy as would every other gangster. The forced contributions for protection by the Pentagon is protection money for protection against threats to national security. The MIC Mafia Industrial Complex.The purpose of the Pentagon is the enforcement arm of the NSA/NSC missions, to secure and protect the world's resources for the WELFARE KINGS.
Oh happy day, the empire is going belly up!
This is the wrong conclusion to draw from this article. The "empire" is still being fully funded, no one in power is seriously talking about cutting military spending; no one is talking about reducing the 1000 or so foreign military bases, ending any of our overt or covert wars etc. The ruling class no longer feels the need for a middle class or any kind of social support for the most vulnerable among us. We are becoming a like a third world country: a tiny, wildly wealthy elite, a much truncated middle class and the vast majority of the population in poverty.
Don't mourn, organize!
Wait till the kettle boils, then see what happens.
Still and all, we should continue funding our completely meaningless wars in Iraq & Afghanistan so that the entire nation is driven utterly bankrupt and all hope for our own children is destroyed, don't you think?
Oh! Oh! And get in a war with Korea and China!!! Let's do that too!
Oh, and don't forget the dreaded Iran or Pakistan...
Meanwhile last week Washington passed a $160 billion budget for the Iraq, and Afghanistan buffets for military contractors. The empire has its priorities, and it aint us.
The ruling elite, the bloody war mongers in congress and the white house, DO NOT get it ! They will go down with the ship of empire !
Last year, in the wee hours of the morning, I caught on C-Span an annual conference of the national auditors reviewing the States' budgets going into the year of 2010. I do not need at this point how bleak it was: the round of auditors representing different States could not hide what cannot even be described as concern, but outright distress. I thought cynically the timing of this conference, somewhere around 2:00am in the morning, when few Americans would see it. And not being filmed by a mainstream news network, they did not carefully, cautiously choose the words they knew would be vetted into soundbytes, and then forgotten with, "And now this..."
By the end of 2009, it was evident California was going to sink like a rock, no matter what it did. New York, Texas, Illinois, and Florida, despite the billions generated in those states, refused to hurt the feelings of their considerable wealthy residents, and so would follow California's fate, though they didn't have to.
The Midwest and the South had long been devastated by outsourcing, their rapidly diminishing revenue will never be replenished. The major cuts to Medicaid and public education were not considered by the auditors of the greatest concern. No, the cuts to law enforcement and the courts would be the fatal wound in the Midwest and the South: even the auditors foresaw the riots(from the most well-armed region of the country, no less) that would result from a bankrupt state. The states would not be able to borrow money from the government by 2011, and given budgets must be planned and balanced a year in advance, nearly every American state in 2010 were a year and at least hundreds of billions of dollars behind...
If I can accidently find myself privy such to a conference and its conclusions, how could Congress act as if they were unaware? I agree with SaboCat as well as the economist Roubini: about the only, if slight, chance of salvaging this wrecked economy was expiring the Bush tax cuts for the wealthy, we are now doomed to destruction.
I do not wax dramatic: I am dead serious. The boom should be lowered by the summer of 2011. While every one is watching the stock market, it is the states that will be crashing around us, and not one by one, but in sixes and sevens. Do not be surprised if the stock market doesn't so much as wince from all the racket, as the trans-national corporations need neither American workers nor consumers to secure their "record-year" production and profits: that is all too clear.
Drink and be merry, for tomorrow we die...
I don't think it'll be all that dramatic. Instead of going out like dominoes I suspect it'll be more like a long drawn out starvation.
School budgets will get cut even more (hey it'll shorten the school year),
services will get cut(you don't really need your street sweepers and garbage picked up every week right?),
The infrastructure will continue to degrade in most cities (small to large disasters will continue to happen because of this and be splashed on TV like it's Fight Night),
Crime will rise (Duh, people are poor, under-educated, and pissed),
Jails will be stuffed to rims until the state and federal budgets can't pay per prisoner(more will be built(No news there).
All this will continue until they've privatized schools enough to pump out little worker bees, Unions will have to cave to most demands because really they've cut everything else why should they be the only ones to keep their goody bags...they'll deregulate because you know republicans are next up on the Presidential revolving door...
Then you add in: Global Warming. Water Shortages in California, Nevada, New Mexico, Texas and anywhere else that need their water piped in from hundreds of miles away and can't keep up the infrastructure to maintain it. Soil erosion in the "Breadbasket/Heartland" due to agribusinesses not taking care of the land. Worsening air pollution causing even more asthma and other respiratory diseases.
Oh...... wait... all that's already happening......RIGHT NOW
These state and municipal bonds are but one of the dominoes. Add to that Corporate Bonds; Peak Oil; China's Housing Bubble; bursting housing bubbles in Europe (Spain is in terrible shape in this regard); money owed to the world's banks by Belgium, Spain, Ireland, Italy, Great Britain, Portugal, Greece; global food crises (as a result of fuel crop pressures and Climate Change); Unprecedented levels of unsecured consumer debt; and there are certainly others I could name and some that haven't yet been thought of.
This thing is a house of cards like nothing the world has ever seen.
Check out "The Automatic Earth" for some great insight into just what kind of a multifaceted shitstorm we are facing in the near-term future.
And the real pig in the python is yet to appear.
Billions, if not trillions, of dollars of pensions for municipal workers and teachers will bankrupt community after community. Most of these obligations are unfunded and must come out of current revenues.
OPEB( other retirment benefits such as health care) will need to be paid as well.
Many teachers and municipal workers gave up current income for lifetime benefits.
They now join the legions of truely screwed.
Come to Pennsylvania where the state legislators voted themselves pay increases to take effect when the Republicans take over next month.
AZ Gov. Jan Brewer looks the other way while ASU President Mike Crow spends public money on lawsuits invited by his bad behavior. The university spends about $3 million a year in litigation alone. Even when faculty win EEOC cases or cases with ASUs of arbitration committee Crow shrugs off the decisions and fires people anyway. The result? Costly litigation and no one in AZ cares. Crow is seen here as Mr. Big who gets things done. Yeah right. ASU is a second rate school. Always has been and always will be.
Don't know about the rest of ASU, but they have world-class astronomy and geophysics faculties/facilities. And no, I have never studied/worked at ASU, though I know many that have/do.
WTF -- I believe you are thinking of University of Arizona in Tucson NOT Arizona State in Tempe (Phoenix). University of Arizona has some excellent science departments and is certainly one of the elite schools in astronomy.
I worked for University of Arizona for over a decade but here is an independent overview:
http://www.ehow.com/list_6121853_top-american-universities-astronomy_.html
Check. I am thinking of Tucson. Thanks for the correction.
The first signs of losing one's mind is ..., um, er... I forget.
Pam Martens at CounterPunch has a very good article about the FED's unauthorized multi-Trillion$ gift to the Banksters. Clearly, as some note, the country has plenty of fiscal resources being spent quite wrongly. Almost another $Trillion was appropriated for war/military just in the past week.
Yes indeedy. Kleptocracy will soon be a household word (as well as Neo-Feudalism).
I am so confused --American's are so willingly to make and fund war--overseas-- but raise taxes to provide for things at home --NO WAY.
The horrible results of Reagan/lottery philosophy is that so many" others" become the victims of IGNORANCE AND SELFISHNESS-- remember the life guard must 1st subdue the drowning person to rescue him.
Where does the city look for money when it's broke?
The People!
One of my concerns is that the Powers that Reign have already factored in a huge crash and are looking for a return to a Neo-Feudalism of some sort.
I'm not quite sure I believe that, but it would be almost better if they are caught off-guard by a collapse because then we'd all have a shot at rebuilding the world more or less together.
-- Zagone
I don't think they will be caught off guard.
Are communities like Beverly Hills, Fairfax Virginia, Nassau County New York, on the list of defaulting, or are the rich doing OK? We could always give them more tax breaks if they are struggling.
The main thing everyone should explore are known as "Sophisticated Financial Instruments" also known as Derivatives.
http://www.nytimes.com/2008/02/01/business/01legal.html
Note that this started in 1999-2000. This firm also was involved in this matter.
http://amlawdaily.typepad.com/amlawdaily/2010/04/mckeenelson-abacus.html
Ellen Brown has good information on derivatives.
The scariest part is that it'll most likely be a downward spiral. Instead of middle class people standing up for the middle class, they'll relish in the persecution...of themselves! This country is so mired in stupidity, religious fundamentalism, self righteousness, and bigotry...they're ready to go right down the toilet, while setting the stage for "saviors" of the worst variety. I think there's an analogue somewhere in the historical record...
I am on our local community service district water board. It occurred to me in a recent meeting when we were discussing our inability to meet our budget that eventually when all the jobs are outsourced to India and China eventually the clean water and sanitation will go there too because we will no longer be able to afford those basic services here.
We need to nationalize the banks and put in place a system of tariffs which protect the wages and jobs of American workers and reinstate a progressive system of taxation. Get the money from those who have it. It only makes sense.
I hope to feel your pain. But wouldn't protective tariffs hurt those forced to shop at Wal-Mart? I'm no economist. High import tariffs might stimulate jobs here at home. But the unemployed, the poor, those trying to make ends meet would be harmed. Even if global free traders may not be as concerned about the sufferings of the poor as they claim.
I think we need a new tax system too, one designed not to benefit the privileged. Reaganomics is a fraud. An econimic philosophy designed to protect the well off. I think the super wealthy earning more than a billion a year could pay sixty or seventy percent in taxes and still afford steak and eggs for breakfast in the morning. And the best seats in the house at a Broadway musical.
"We need to nationalize the banks "
Nationalize all you want, if the fedgov or local govs keep spending twice as much as they bring in, that money is gonna run out as well. What do you do after that?